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EMC Stops, Smells Roses

EMC vows to put its billfold away and focus on what it already has.

EMC(NYSE:EMC) used to be a stodgy storage specialist that derived all of its sales and profits from cranking out racks of hard drive enclosures and related accoutrements. That's not the case anymore.

The storage business has generated plenty of cash over the years, as data centers everywhere loaded up on EMC's storage solutions. And then management started to look beyond storage. Checkbook in hand, it went out searching for new opportunities.

Today, the storage business is still the heart and soul of EMC, providing 66% of total revenues. But other segments have taken on increasingly important roles, too. Information storage products now form the lowest-margin business segment, and revenue growth is getting hard to come by in that arena. The rising stars are products like content management solution Documentum and virtualization platform VMware, with 2006 sales 42% and 83% above 2005 totals. We don't have operating income information for each segment in 2006, but in 2005, the storage unit commanded 44% margins, far behind the 82% take for VMware.

Management says that the acquisition spree is over for now, and there are no major purchases planned for 2007. The battle cry this year is "organic growth!" and EMC will batten down the hatches to do more with the assets it already has.

That sounds like a good idea to me. It must be tricky to incorporate 22 new units over the course of just three years, all while the competition heats up for the markets EMC already owns. All the major UNIX flavors now come with virtualization features built in, for example. That puts VMware in direct competition with the likes of IBM(NYSE:IBM), Sun(NASDAQ:SUNW), and Hewlett-Packard(NYSE:HPQ). If that wasn't enough, mighty Microsoft(NASDAQ:MSFT) is pushing hard for its own solution, Microsoft Virtual Server.

So take a deep breath and gather your strengths, EMC -- you have plenty of them. While Microsoft is busy with the Vista release, IBM is rebuilding itself, and Sun is off exploring new hardware platforms, you can take some time to optimize your operations.